Growth stalled, while profitability deterirates

By Kim Jae-won

Korea’s four biggest financial groups, assailed with criticism for unfair business practices, have been faltering due to the double burden of stalled growth and deteriorating profitability.

Following Hana Financial Group’s acquisition of Korea Exchange Bank (KEB) earlier this year, the “big four” ― Woori, KB Kookmin, Hana and Shinhan ― have become almost homogenized in all aspects, including total assets, net profits, number of branches, number of employees and deposits.

They have been trying to seek new growth opportunities both at home and abroad but their efforts have all stopped, hit by the prolonged global economic slowdown. Instead, they have focused on enhancing profitability but first-half scorecards are unsubstantial.

Over the past six months, total assets for the major banking groups remained little changed between 350 trillion and 400 trillion won. Due to market volatility, their merger and acquisition attempts ended in failure. Besides, it was impossible to achieve organic growth as the domestic retail market became rapidly saturated

Amid stalled growth, net profit dropped drastically in the first half due to deteriorating interest margins and rising risks in home-loans caused by the sluggish real estate market.

Net income for Woori, KB and Shinhan plunged more than 20 percent for the first six months of this year from 12 months ago largely as their net interest margins narrowed. They also had to set aside more loan-loss reserves.

Only Hana saw its net income rise 77.2 percent during the same period but because of a one-off factor ― gains from the takeover of KEB at a cheaper price than the lender’s book value.

“This is a time of low interest rates. There is no way that lenders can make big earnings at this time,” said Jeon Hyo-chan, a senior economist at Samsung Economic Research Institute.

Korea’s central bank cut the key interest rate by 25 basis points to 3 percent last month to boost the sluggish economy. Experts say the Bank of Korea may shave the benchmark rate further by the end of this year which will hurt commercial lenders’ profitability.

"The central bank's rate cut is likely to put downward pressure on banks’ net interest margin," Yoon Jong-kyoo, chief financial officer of the group, told investors.

Jeon said the gloomy economic outlook has also enforced financial institutions to set aside more provisions for possible losses on loans. Woori allocated 924.9 billion won in loan-loss reserves in the second quarter, up 113 percent from three months ago.

It posted the lowest net income among the four groups with 938 billion won for the six months, down 27.6 percent from a year ago. KB marked 1.2 trillion won during the same period, down 28.2 percent from a year ago. Shinhan’s net profit also tumbled 22.8 percent to 1.5 trillion won but had better results than its competitors thanks to its well-designed business portfolio.

Hana said it posted a net income of 1.5 trillion won but of that, 1 trillion won came from the acquisition of KEB. Hana bought a 51-percent stake in KEB from U.S.-based Lone Star Funds for 3.9 trillion won, about 477.9 billion won less than the lender’s book price.

The groups’ net interest margin (NIM), a gauge of profitability, declined amid falling market rates. KB posted the highest NIM with 2.93 percent in the second quarter followed by Shinhan and Woori which marked 2.52 and 2.4 respectively. Hana came in last with 2.2.

More concerning is that business performances for banking groups is not likely to improve in the latter half due to the government’s tighter control of lenders and possible key rate cuts.

“NIMs are expected to further deteriorate in the second half as the central bank is expected to make additional rate cuts,” said an analyst from Shinhyoung Securities.